The news that yet another lender has withdrawn from the mortgage market is undoubtedly bad news for borrowers but there is no cause for panic. Anyone with a good credit history and a reasonable amount of equity in their property should still have no trouble finding a home loan. In most cases, borrowers looking to re-mortgage will still be able to find deals better than their existing lender’s standard variable rate.

However, the fact that lenders are now competing not to have the best deals means that the cost of loans is creeping higher. Nor is there any guarantee that a cut in the Bank of England base rate widely expected next week will make the situation better.

The essential problem is that lenders with the best deals are attracting more customers than their wholesale lending, deposit taking or administration capacity will allow. Borrowers who have a chequered credit history, little equity in their home, or first time-buyers with no deposit face the biggest increase in rates because with house prices falling they are perceived as a greater risk.

Indeed, the biggest threat of this latest phase of tightening in mortgage lending is the impact it will have on house prices.

The less the banks are prepared to lend, and the higher the rates they are prepared to lend at, the less money there is swilling around to support house prices. If house prices therefore start a significant shift downwards, the banks will become even more reluctant to lend because they will be worried about bad debts and negative equity. This in turn will mean even less money available to support prices and we may enter a destructive cycle that leads to a full scale slump in property values.

Nonetheless, this still remains a worst case scenario. The Bank of England may soon lower the cost of borrowing, which should support confidence and eventually make mortgages cheaper. Also, while levels of employment remain high, demand for property should remain reasonably robust and there will not be enough homeowners selling for “distressed” reasons to undermine the market.

Over time, with concerted action by central banks, the credit crunch should ease. The wholesale money markets should improve and banks will once again start competing for home loans. However, that is the best-case scenario and remains some way off yet.